Kelvin Koh, former partner at Goldman Sachs, and current CIO at crypto hedge fund Spartan Capital, recently made a guest appearance on the Blockcrunch podcast with Jason Choi. During their conversation, the two spoke about the mentality behind shorting Bitcoin and other cryptocurrencies, as well as how derivatives markets affect institutional investments and spot trading.
“In a traditional asset class, you would generally look for companies that have poor fundamentals, and pick your shorts that way,” said Koh.
Koh also argued against the general concerns with regard to derivatives of Bitcoin and other cryptocurrencies. He spoke about how some members of the community predict Bitcoin will decouple from its demand and supply balance as it becomes more of an investment asset, and people start preferring to minimize their exposure to Bitcoin through derivatives, which affords greater liquidity.
“I don’t necessarily agree with this,” he said, explaining how derivatives, particularly on regulated platforms like CME and Bakkt, increase the liquidity of the asset and enable institutional investors to enter the space.
“The deeper liquidity and the regulated nature of the platforms will attract more capital into the space.”
Koh also explained that with deeper liquidity comes better price discovery and more efficient markets. He also said that he didn’t think Bitcoin would decouple from its underlying supply and demand, and pointed out how commodities with very developed derivatives markets experienced over 10x gains between 2002 and 2007.
“Just because people are trading derivatives doesn’t mean the price of the asset cannot go up.”
“Tomorrow, if OPEC decides to cut production by half,” he said, “the oil price will still experience a spike, even though the spot trading of oil only accounts for 1/30 of its derivatives’ volume.” He also tackled comments about how derivatives trading has capped the price of gold.
“I think this is a fallacy,” he said, drawing attention to how gold’s market capitalization appreciated by over 25x from $81 billion in 1950 to around $2.3 trillion thirty years later. “It has a very different volatility and supply profile to Bitcoin, but if you look at the history of gold, it’s market cap grew from $2.3 trillion in 1980s to $7.3 trillion today.”
With Bitcoin increasingly being used as a store of value, Koh said that perhaps eventually, the original cryptocurrency could complement gold in that regard.